Metamortages, and the Power of Financing
Securing Equitable Access to Virtual Real Estate — Part 5/5
Note: This is the fifth in a series of five articles on creating more equitable access to virtual real estate (“VRE”). If you’d like to start from the beginning, you can access the first article here.
The theme of this series of articles has been an exploration of ways to address the highly inequitable distribution of virtual real estate. (Just 10 people, for instance, own 15% of The Sandbox.) Virtual real estate may be new, but the need to bring more people into the fold of property ownership is a situation that we have addressed a few times in the past. Of all the means attempted, probably the most successful has been making financing more available. I believe a brief look at the history of homeownership in America can offer some guidance for the Metaverse’s next steps.
In the first half of the 1800s, the United States found itself in possession of lots of open territory to its West. Displacing or killing indigenous people, as well as purchasing and seizing lands from other imperial powers, left the country with an unfathomably large amount of space to fill and “settle”. Initially, you could use your money to purchase the title to some land from the US government. After the Homestead Act of 1862, you could simply claim 160 acres for yourself by moving in and farming it. I believe this “move-in” period in American history is the most analogous to what we’re experiencing now. You use your own money to buy the title in the form of an NFT and move onto your plot.
The need that was felt then is similar to the that which we are beginning to feel now: regular people just don’t have the money on hand to purchase the real estate they want. In 1863 and 1864, the “National Bank Acts” set up the US National Banking System. This made it so loans could be issued across the American territory to purchase things like real estate. And, this is likely our next step as well. We will soon need to establish some lending infrastructure so people of average means can buy virtual land.
And, to an extent, it has already begun. Vera has announced a program to make the first virtual mortgages available. They are specifically offering them only for use on “Netvrk” metaverse. Netvrk has not yet launched, though, so the mortgage program is still forthcoming. It will be interesting to see if they are in fact the first out of the gate.
We have a lot of the parts in place for someone to make this happen for other platforms. People are already doing a ton of lending on the blockchain through various decentralized financing (“defi”) protocols. There are even examples of NFTs being used as collateral! NFTfi, for example, has a marketplace where you can do exactly that. They offer credit in the amount of 10–20% of your NFT’s value, and an interest rate from 12–15% on the loan. To turn this into a virtual mortgage, someone would need to purchase the NFT representing the parcel of land on the borrower’s behalf, provide use of the parcel to the borrower, and then transfer the NFT to their wallet after the loan was paid in full. This could all be set up in through smart contracts and occur quite automatically, but there would certainly be risk involved for the lender!
For this reason, I imagine the terms of the first iterations of VRE mortgages are going to be rather unappealing. In the early 1900s a bank typically required a downpayment of 50% of the full value of a property in order to write a mortgage. While I was unable to find information on the interest rates at that time, it was standard interest-only monthly payments to be made over the course of five years. At that time, the full loan amount would need to be paid in one lump sum by the borrower (a “balloon payment”). This priced a lot of people in that era out, but between what was available and the Homestead Act previously mentioned, by 1900, 46.5% of Americans still managed to live in a home that their family owned.
To have mortgages in the Metaverse that are more similar to what’s currently available in the real world, it will require systems like those developed around the end of The Great Depression. Homeownership had dipped and a quarter of mortgages were in default by 1934. In response, the government established the Federal Housing Administration (the FHA). The goal of the FHA was to insure home loans, so long as they conformed to certain requirements. By protecting lenders from default, the FHA made possible the modern 15 and 30-year mortgage with a lower downpayment. This was successful, and homeownership rates grew nearly 20% between 1940 and 1960. After metaverse financing is established and operating, perhaps we will see DAOs formed with the capacity to insure loans in the same way. This will make the terms of the financing more appealing. There are steps to travel beyond that as well (creating secondary markets, etc.), but I realize that I’ve already run my readers pretty far down the rabbit hole. Perhaps that’s an article topic for another day.
We should remember that there is a tension that exists between the desires of homebuyers and the desires of homeowners. You generally can’t have both sides win: you either have more affordable properties or more valuable properties. Financing has proven itself to be one of the very best means of balancing these two interests, in that it both makes properties more accessible and more valuable. After all, prices tend to go up when money is made more available to buyers. Therefore, it only makes sense that mortgages will soon arrive in the realm of virtual real estate, too.
You generally can’t have both sides win: you either have more affordable properties or more valuable properties. Financing has proven itself to be one of the very best means of balancing these two interests, in that it both makes properties more accessible and more valuable.
This series of five articles has set out a few suggestions for making VRE more accessible. I wrote it in reaction to the realization that people of ordinary means are now priced out. I believe this will become a valuable and productive asset class soon, and for it to be out of reach from its very inception is a shame — particularly for a resource that need not be scarce at all! I worry that it will eventually end up in a state where very few organizations own a great deal of property. Taking action now to make the small changes outlined here will serve to change that trajectory. And, like steering a battleship, the change does not need to be a big one for us to end up in a very different place — so long as it’s done early enough. We should begin immediately.
